All-Weather Stocks: Still Outperforming (Though Not All Of Them)

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Download related file: All-Weather-Performers-Tracking-Report-12-06-13

By Rudi Filapek-Vandyck and Andrew Nelson

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Three types of Australian listed stocks have proved an absolute boon for loyal shareholders and investors in the post-2008 era: reliable dividend payers such as Telstra ((TLS)) and the Big Four Banks, All-Weather Performers such as Woolworths ((WOW)), Amcor ((AMC)) and CSL ((CSL)) and stocks experiencing an operational sweet spot, generating strong profits and shareholder returns along the way.

All three categories have one key characteristic in common: they are able to generate satisfactory returns even when risk appetite retreats or economic momentum wanes. In mid-March this year FNArena opened this new series with an inaugural update on All-Weather Performers, see story "All-Weather Stocks: MND And BKL In The Red". The following week we took a look into stocks we think are experiencing an operational sweet spot. Note that we intend to make this an interactive exercise: readers are encouraged to nominate stocks they believe should be added to our updates. Send your nominations to info@fnarena.com and we will follow up and consider.

At the basis of all this lays research by FNArena Editor Rudi Filapek-Vandyck since late 2007 which earlier this year led to the publication of "Make Risk Your Friend. Finding All-Weather Performers", an eBooklet which to date is exclusively available to paying FNArena subscribers (if you haven't received your copy as yet, send an email to info@fnarena.com).

The eBooklet argues that successful investing is closely correlated to minimising and managing risk. Hopefully the framework we are creating with these regular updates will assist subscribers in executing successful, long term investment strategies.

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Three major forces have impacted on All-Weather Performers since our last update in May: a sharply weakening Aussie dollar, a general correction in equity markets after the stellar run since last year and profit taking ahead of the end of financial 2013 (domestic), and a potential "tapering" of monthly Fed bond purchases in the US (international). Contrary to general expectations, in particular since high risk assets have largely remained out of favour, the sell-off in outperforming, defensive assets has been rather pronounced, including for dividend-oriented assets.

One thing hasn't changed though and that is that All-Weather Performers, as a group, continue to perform better than the ASX200. No reason to get too cocky about it as the group performance masks some very nasty hits for certain individual members.

As a group, All Weather Performers are down 7.3% from mid-May levels. The broader market is down over 9% over the past month. For the year to Tuesday, 11 June 2013, All Weather Performers have so far booked a modest gain of 0.51% versus a now 0.67% deficit in the All Ords since January 1. Note these calculations do not include any dividend payments during the period.

With hefty swings and falls on currency markets, the Australian share market has temporarily become a currency-leveraged trading play and the basket of All-Weather Performers has not been left untouched. Ansell ((ANN)) has instantaneously turned into safehaven-with-a-bite, rewarding shareholders with a market beating performances of more than 4% over the month past. Remember, this performance occurred against a generally weaker share market. Year to date Ansell is up around 17%.

The company has significant plants and sales overseas and should be a significant beneficiary of a weaker Aussie in the coming reporting periods.

Only one other member has managed to post a positive performance since mid-May and that is ToxFree Solutions ((TOX)), carried by the acquisition of Wanless Enviro Services for $85m, funded by debt and a $43m capital raising at $3.16 a share. Analysts at Macquarie said the acquisition will provide the company with some decent commercial and industrial scale in Queensland. Macquarie otherwise finds the stock is fairly valued for the near term, but it does see medium-term options for growth, both organically and from acquisitions.

Despite a stellar performance over the past years, this latest acquisition proved enough to keep the Tox Free share price in positive territory. Another stockbroker who covers the stock, JP Morgan is also positive about this latest deal, noting it further diversifies the business away from hazardous waste and the resources sector. The broker assumed the move would be well received by investors, particularly in an equity market which has rallied well ahead of forecast earnings changes. A few weeks later and it looks like JP Morgan analysts were right on the money.

Two other stocks also managed to materially outperform the broader share market over the past month, but still suffered losses nevertheless; Blackmores ((BKL)) and Ramsay Healthcare ((RHC)). There is a fair argument to say there is some currency impact in play here too, but Blackmores already had corrected in advance and Ramsay continues to announce new deals and acquisitions.

Blackmores shares are down around 4.7% over the month. JP Morgan argued at the end of April that near-term headwinds in the form of continuing structural change to traditional distribution channels and aggressive advertising campaigns and pricing competition were going to act as a barrier for the share price. The losses should thus not come as too big a surprise. Shares in Ramsay Healthcare are only 1.5 % lower since May 14.

Here’s how BA-Merrill Lynch, the only broker in the FNArena universe who still stoically sits at Buy, described the outlook for Ramsay a few weeks back: The importance of private hospital operators and the regulatory strength of the health insurance sector was in evidence in the 2013 Budget. BA-Merrill Lynch thinks Ramsay also has the lowest regulatory/funding risk profile in the sector, with growing margins that should continue to add to earnings upside.

On the other side of the ledger, four members of the All-Weather family suffered severe losses. Retail Food Group ((RFG)) is down 20% since mid-May, Monadelphous ((MND)) is down 19%, Domino’s Pizza ((DMP)) is down more than 13% and Invocare ((IVC)) lost more than 12%.

Retail Food Group shares are still up 4.1% for the year (plus interim dividend). The group recently purchased two properties in SE Queensland. Stockbroker UBS, for one, took comfort in the fact the company is using a tested formula that was successful with Donut King.

The sector pains for services providers to miners and explorers are well-known by now and industry bellwether Monadelphous ((MND)) is simply falling victim to what increasingly has taken the shape of a vicious, prolonged downturn for the sector in general. Value-hunters beware! Note NRW Holdings ((NWH)) issued yet another profit warning this week. Monadelphous shares are down 34% so far this year and analysts continue to make major adjustments to forecasts and valuations.

JP Morgan, at the end of May, agreed Monadelphous has capabilities to go into the broader construction sector, but the transition is expected to be slow and difficult. As such, the broker remained at Underweight, as are five of the seven brokers in the FNArena Database.

Domino’s Pizza shares are still up 11% so far this year, illustrating the size of the outperformance that preceded the current weakness. The last stockbroker we heard from on the stock was UBS at the end of April, the broker stating the share price rally through April was hard to justify and posed increasing downside risks.

Invocare shares suffered heavily after management's comments at the recent AGM disappointed, but shareholders are still almost 18% ahead of the market year to date. Stockbrokers had already been overwhelmingly of the view that Invocare's valuation had run up too high. Post the AGM, and despite the share price correction, UBS downgraded to Sell.

Macquarie, however, took a longer term view and kept its Outperform rating unchanged.

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